The midpoint of the year is often a practical time to take stock of savings progress and ensure that your long-term financial goals are still on track. For retirement-minded investors, that review may include whether fixed annuities have a place in their portfolio.
Fixed annuities are designed to offer protection from market losses, the potential for growth, and, in some cases, income you cannot outlive. In simple terms, a fixed annuity is a contract with an insurance company. You pay a lump-sum premium, and in return, the insurance company provides certain accumulation and/or income guarantees.
Here are a few common types of fixed annuities and how they generally work:
Single Premium Immediate Annuities — These annuities are built for people who want income to start soon—typically within one year after the premium is paid. They can be set up to provide guaranteed income for life for you, and potentially for your spouse as well. The amount of income depends on the insurance company and factors such as life expectancy. Some contracts can also be structured to pay income for a set number of years instead of for life.
Deferred Income Annuities — These work much like immediate annuities, except the income begins later. You choose a future start date, at least one year after the initial premium is paid. Generally, the longer you wait to begin income—and the older you are when payments start—the higher the guaranteed income amount may be.
Fixed Interest Annuities — These annuities are designed to grow at a guaranteed interest rate for a specific period of time. They are often compared to bonds or other lower-risk, interest-bearing investments. Your contract value grows tax-deferred until you take income from the annuity, and some contracts can also provide guaranteed lifetime income.
Fixed Indexed Annuities — Fixed indexed annuities also provide principal protection and tax-deferred growth, but they add another feature: the opportunity to earn interest based partly on the performance of a market index. If the index performs well, the annuity may credit interest, subject to limits such as a cap, spread or participation rate. That means your credited return will usually be less than the index return. If the index performs poorly, most contracts include a 0% interest-rate floor, so your contract value does not decline because of market performance. These contracts may also offer guaranteed lifetime income options.
Like any long-term investment, annuities come with important details to understand, including withdrawal charges, fees and expenses. They can also be complex, so it is important to review the features, risks and costs before making a decision. Your Benjamin F. Edwards financial advisor can help you think through whether an annuity fits your needs and how it may work alongside the rest of your portfolio.
*Note: All annuity guarantees are subject to the claims-paying ability of the issuing insurance company.
IMPORTANT DISCLOSURES: The information provided is based on internal and external sources that are considered reliable; however, the accuracy of this information is not guaranteed. This piece is intended to provide accurate information regarding the subject matter discussed. It is made available with the understanding that Benjamin F. Edwards is not engaged in rendering legal, accounting or tax preparation services. Specific questions on taxes or legal matters as they relate to your individual situation should be directed to your tax or legal professional.